Apple Could Pay Staggering Price for E-Book Shenanigans

Apple may be deeply regretting its decision to fight e-book price-fixing charges in court instead of settling like its coconspirators did. Having lost Round 1, it now faces the possibility of penalties that could drastically deplete its revenue while bolstering the competition. Of course, the game is not over. There's a long -- and no doubt costly -- appeals process ahead.

The United States Department of Justice and 33 states' attorneys general have proposed remedies against Apple for its conviction on e-book price-fixing that could dry up a large portion of the company's revenue stream while benefiting Amazon and, possibly, Google.

The proposed final judgment seeks to have Apple terminate contracts with the five codefendant publishers in the case; hobble its ability to enter contracts for any and all content; and require Apple to hire a full-time internal antitrust compliance officer. The proposed final judgment also asks the court to appoint an external compliance monitor.

"My first impression on reading the recommendations is that they do not come across as fair to Apple," Jeff Orr, a senior practice director at ABI Research, told MacNewsWorld. "My second thought is, we're talking about the penalty phase -- and this definitely comes across as a penalty."

The proposed remedies "are an Amazon dream," remarked Carl Howe, a research vice president at the Yankee Group. However, "the big wild card here is Google, which hasn't really chosen a side in the e-book battle other than the one where it doesn't want to pay anyone for the right to search books."

The Gist of the Proposed Remedies

The proposed remedies fall into three general categories:

First, preventing Apple from repeating the conduct that led to its prosecution. Among other things, the PFJ seeks to preclude Apple from entering contracts for any content -- including e-books, music, movies and TV shows -- that might force the competition to raise prices. It also recommends restricting the company from sharing information with publishers, as well as imposing a five-year ban on retaliating against publishers for refusing to sell e-books on agency terms. Further, the proposal would prohibit Apple from discriminating against rival e-book apps.

Second, ameliorating the harm Apple caused to competitors and consumers. It would have to terminate existing agency agreements with its five publisher codefendants: Hachette Book Group; HarperCollins; Simon & Schuster; Penguin; and MacMillan. For two years, Apple would have to let competitors include hyperlinks to their own e-bookstores within their iOS apps. Apple would be required to report any information it obtained that might indicate collusion among content suppliers.

The PFJ states that it takes into account Apple's "pervasive disregard for the requirements of the antitrust laws" and seeks to, among other things, prevent recurrences of the same or similar violations of these laws. However, it is "not unduly burdensome" and will let Apple compete vigorously and lawfully.

A DoJ spokesperson was not immediately available to provide further details.

Impact of the PFJ

If the court accepts the proposed remedies in full, "it will take away a significant portion of revenue from Apple," ABI's Orr pointed out. Further, "this recommendation's wording talks about any and all content, not just e-books -- and that to me goes beyond the scope of what Apple was found in violation of."

The impact on Apple could be considerable -- its iTunes billings translated to revenue of US$2.4 billion in the third quarter. iTunes is the largest digital content store in the world, with 35 million songs in its catalog. It offers movies in 109 countries and its iBookstore in 155 countries.

Educational institutions and schools might suffer collateral damage, because "Apple has a very large education marketplace and carries e-books for iTunes University and K-12 curriculums," Orr suggested.

On the other hand, "ordinary e-books such as the ones Amazon sells aren't a big part of Apple's business yet," the Yankee Group's Howe told MacNewsWorld. Apple "has its own vision for e-books that creates a much more interactive and immersive experience, which is why it introduced its iBooks Author product."